ECB Monetary Policy and Bank Default Risk

41 Pages Posted: 9 Jun 2020 Last revised: 29 Nov 2021

See all articles by Nicolas Soenen

Nicolas Soenen

Ghent University - Department of Economics

Rudi Vander Vennet

Ghent University - Department of Financial Economics

Date Written: July 30, 2021


We empirically analyze the effect of ECB monetary policy on bank default risk, captured by bank CDS spreads, of Euro Area banks during the period 2008-2018. We disentangle the impact of monetary policy in a direct channel and an indirect effect operating through a sovereign risk channel. We document that accommodative ECB policies in general lower bank default risk. ECB policy actions exert their beneficial effect on the banks’ perceived risk profile through a combination of a direct effect and an indirect-through-the-sovereign effect. We demonstrate that these effects are stronger for banks in peripheral countries of the Euro Area and that the downward effect on bank default risk was especially pronounced in the 2012-2014 sovereign stress period. Yet, our time-varying impact analysis shows that the beneficial effect of ECB policy persists in the post-2014 era during which the ECB implemented its asset purchase program and other unconventional tools. Our results support the argument that, on balance, the beneficial effects of accommodative ECB monetary policy on Euro Area banks’ risk profile outweigh any negative side-effects.

Keywords: Bank default risk, CDS spreads, Monetary policy, Sovereign risk

JEL Classification: G21,G32,E52

Suggested Citation

Soenen, Nicolas and Vander Vennet, Rudi, ECB Monetary Policy and Bank Default Risk (July 30, 2021). Journal of International Money and Finance, Forthcoming, Available at SSRN: or

Nicolas Soenen (Contact Author)

Ghent University - Department of Economics ( email )


Rudi Vander Vennet

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
+32 9 264 35 13 (Phone)
+32 9 264 35 92 (Fax)

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